Cultural Tightness and Financial Market Stability—Evidence from Stock Price Crash Risk

Maintaining the stability of the financial market and preventing and controlling financial risks are important contents of China’s economic construction. Based on the theoretical framework of cultural tightness proposed by Gelfand et al. (2006), this paper uses the sample of Chinese A-share listed firms from 2008 to 2019, exploring the impact of informal institutions on financial market stability from the perspective of stock price crash risk. We find that the regional cultural tightness has a significant impact on the firm’s future stock price crash risk. The higher the cultural tightness is, the lower the risk of stock price crash is. Further findings are as follows. First, improving information quality and choosing the Big 4 audits are the main mechanisms for cultural tightness to affect the risk of stock price crash. Second, after analyzing the effect strength of cultural tightness, the impact of cultural tightness on the firms’ stock price crash risk is mainly reflected in older firms and firms whose managers do not have overseas experiences. Third, considering other mechanisms of corporate governance, the association between cultural tightness and future stock price crash risk is stronger when the firm’s governance mechanisms are weaker. Last, comparing the cultural tightness of the firm’s location with that of the manager’s hometown shows that the association between cultural tightness of the firm’s location and future stock price crash risk is stronger. It shows cultural tightness has “assimilation” effect on individuals. This paper reveals the important impact of informal institutions on the stock price crash risk, and has important theoretical and practical significance for preventing financial risks and maintaining the stability of financial markets.